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on Public Economics |
| By: | Hans A. Holter (Department of Economics, University of Oslo); Dirk Krueger (Department of Economics, University of Pennsylvania); Serhiy Stepanchuk (Ecole Polytechnique Fédérale de Lausanne, Switzerland) |
| Abstract: | How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark, would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity. |
| Keywords: | Progressive Taxation, Fiscal Policy, Laffer Curve, Government Debt |
| JEL: | E62 H20 H60 |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-039&r=pbe |
| By: | Marcus Roller; Kurt Schmidheiny |
| Abstract: | In fiscally centralised countries with a unique country-wide income tax schedule, it is straightforward to quantify the degree of progressivity. In fiscally decentralised countries with varying local tax schedules, however, this is not the case. In these countries, the effective tax progressivity depends on the distribution of taxpayers across local jurisdiction as well as on local income distributions. The latter might differ systematically because high income households can partly or fully avoid high tax rates by sorting into low tax locations. This paper develops an empirical approach in order to quantify the effective tax progressivity in a fiscally highly decentralised country - Switzerland - taking the relative size of jurisdictions and the actually observed income sorting into account. Exploiting data on the universe of Swiss taxpayers, we find that rich households face significantly lower tax rates and lower progressivity than in the benchmark case that does not take the income sorting into account. The results are stronger for singles than for families indicating that singles are more sensitive to tax differentials than families. Furthermore, we find suggestive evidence that due to this income sorting the Swiss income tax system is not only less progressive but even regressive for single households with very high incomes. |
| Keywords: | Progressive Taxation; Fiscal Decentralisation; Income Segregation; |
| JEL: | H71 H73 R23 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa14p1354&r=pbe |
| By: | Guner, Nezih; Lopez-Daneri, Martin; Ventura, Gustavo |
| Abstract: | We evaluate the effectiveness of a more progressive tax scheme in raising government revenues. We develop a life-cycle economy with heterogeneity and endogenous labor supply. Households face a progressive income tax schedule, mimicking the Federal Income tax, and flat-rate taxes that capture payroll, state and local taxes and the corporate income tax. We parameterize this model to reproduce aggregate and cross-sectional observations for the U.S. economy, including the shares of labor income for top earners. We find that a tilt of the Federal income tax schedule towards high earners leads to small increases in revenues which are maximized at an effective marginal tax rate of about 36.9% for the richest 5% of households -- in contrast to a 21.7% marginal rate in the benchmark economy. Maximized revenue from Federal income taxes is only 8.4% higher than it is in the benchmark economy, while revenues from all sources increase only by about 1.6%. The room for higher revenues from more progressive taxes is even lower when average taxes are higher to start with. We conclude that these policy recommendations are misguided if the aim is to exclusively raise government revenue. |
| Keywords: | labor supply; progressivity; taxation |
| JEL: | E6 H2 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10071&r=pbe |
| By: | Bartels, Charlotte; Jenderny, Katharina |
| Abstract: | A large literature has documented top income share series based on income tax statistics using the common methodology established by Piketty (2001, 2003). The disappearance of capital income from the income tax base in many countries poses a major challenge to the comparability of these series both over time and between countries. First, we extend the existing German series including capital gains to 2010, and the series excluding capital gains to 2008. Second, we derive three homogeneous series by simulating legislative definitions of capital income prevailing in Germany between 2001 and 2010. For both simulation and the exclusion of capital gains, we employ a rich data set containing the tax files of all income taxpayers. Third, we construct a composite measure of stock dividends and interest income tax ows as a proxy for capital income missing in the data since 2009. We find that the drop in top income shares obtained from income tax statistics in the crisis year 2009 is largely attributable to the exclusion of capital income from the income tax base. |
| Keywords: | income inequality,income distribution,top incomes,taxation,capital,gains,Germany |
| JEL: | D31 H2 J3 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201432&r=pbe |
| By: | Yutaro Hatta (Graduate School of Economics, Osaka University) |
| Abstract: | This paper studies investment decisions by economic agents in cases where the tax rate is decided through voting. It will be shown that, in some cases, only a Pareto-dominated tax policy on the wrong side of the Laffer curve is supported under rational expectations. Thus, the governments may collect revenue in an inefficient way. To that end, a quite plausible assumption, the endogeneity of the return on investment, is essential. Therefore this paper warns about the danger of inefficiency in a wide variety of policies. Further, the model predicts that when the inequality in an economy is low, the tax policy on the wrong side is likely to arise. |
| Keywords: | Political economy; The Laffer curve; Inefficiency in fiscal policies |
| JEL: | E22 E62 H21 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1436&r=pbe |
| By: | Ghosh, Sugata; Wendner, Ronald |
| Abstract: | This paper analyzes the impact of positional preferences, exhibiting conspicuous consumption and conspicuous wealth, on optimal consumption- and income taxes, for an endogenous growth model with public capital. Positional preferences raise the endogenous growth rate if the elasticity of intertemporal substitution is larger than one. Even if labor supply is exogenous, the consumption externalities introduce distortions so long as preferences are wealth-dependent, and with or without the presence of conspicuous wealth. Consequently, optimal consumption- and income taxes differ from zero. Numerical simulations present the effects of fiscal policy on the balanced growth path and transitional dynamics. |
| Keywords: | Conspicuous consumption, conspicuous wealth, endogenous growth, public capital, optimal consumption tax |
| JEL: | D62 D91 E21 H21 O41 |
| Date: | 2014–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:60337&r=pbe |
| By: | Milligan, Kevin; Smart, Michael |
| Abstract: | We estimate the elasticity of reported income with respect to tax rates for high earners using sub-national variation across Canadian provinces. We argue this allows for better identification of tax elasticities than the existing literature. We find that elasticities of reported income at the provincial level are large for incomes in the top one percent, but small for lower earners. There are strong indications that the response happens both through earned and capital income. While our estimated elasticities are large, changes in tax rates cannot explain much of the overall long-run trend of higher income concentration in Canada. |
| Keywords: | income concentration, income taxation, taxable income elasticity |
| JEL: | H21 H24 D31 |
| Date: | 2014–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:clssrn:clsrn_admin-2014-52&r=pbe |
| By: | Valkonen, Tarmo; Kauppi, Eija; Suni, Paavo |
| Abstract: | This study simulates with two dynamic models the macroeconomic and public finance outcomes of a reduction in the corporate income tax rate in Finland. FOG-model is a dynamic CGE model, which is calibrated to the Finnish economy. NiGEM is a multi-country macroeconometric model. The results show that a surprising cut in the corporate income tax rate falls after all adjustments both on new investments and the yield of existing capital. The losses in the tax revenues are capitalized in the market value of the firms, of which many are partly foreign-owned. Investments increase, but the influence in production is mitigated by low reaction of labour supply. Wages increase as well as the public expenditure relates to wages. Gross profits do dot change much. The dynamic effects on tax bases compensate for 30–50 per cent of the losses in the corporate income tax revenues, depending on the model used. If also the increased public expenditure is considered, the compensation rate falls to 25–30 percent. If the tax rate cut is announced well in advance, both the macroeconomic and the public finance results are more favourable. The simulations do not consider the positive effects of profit shifting on corporate income tax revenues. |
| Keywords: | Corporate and capital income taxation, dynamic effects, CGE model, macroeconometric model |
| JEL: | H22 H25 C54 C68 |
| Date: | 2014–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:rif:report:41&r=pbe |
| By: | George Hondroyiannis (Bank of Greece); Dimitrios Papaoikonomou (Bank of Greece) |
| Abstract: | The impact of fiscal policy on economic growth is investigated within a panel of euro area member states over the period 2004-2011. We mainly consider fiscal impulses identified by (a) changes in the structural primary balance, complemented by evidence from (b) the IMF narrative shocks developed by Devries et al (2011) and (c) a VAR-based measure of unanticipated policy announcements. Aggregate fiscal multipliers are estimated in the region of 0.5, although we find considerable variation depending on the fiscal mix, the degree of openness and the state of the economy. During episodes of recession, tax hikes become significantly more costly in terms of output than expenditure cuts. This appears to be related to increases in the share of hand-to-mouth consumers, proxied by the unemployment rate. Fiscal effects are generally more muted in open economies and during periods of positive growth. Country-specific features in Greece lead to significantly higher estimates, possibly in excess of unity in 2011, reflecting predominantly sizeable revenue effects. |
| Keywords: | Fiscal multipliers; state-dependence; euro area |
| JEL: | E62 H22 H50 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:187&r=pbe |
| By: | Masako Oyama |
| Abstract: | There have been many theoretical and empirical researches on the effects of income distribution on economic growth. This paper uses Japanese prefectural panel data to empirically analyze how income distribution affects economic growth. Four measures of the income distribution are used in the system GMM estimations. The Gini indices, income share of the third quintile and the ratio of the income share of the top decile and the 5th decile show that income inequality has negative effects on growth. The ratio of the income share of the bottom decile and the 5th decile does not have statistically significant effects. Therefore, the estimation results show that the increased income inequality in recent Japan decreased the economic growth. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0917&r=pbe |
| By: | Matthew Weinzierl |
| Abstract: | This paper explores how the persistently popular "classical" logic of benefit-based taxation, in which an individual's benefit from public goods is tied to his or her income-earning ability, can be incorporated into modern optimal tax theory. If Lindahl's methods are applied to that view of benefits, first-best optimal policy can be characterized analytically as depending on a few potentially estimable statistics, in particular the coefficient of complementarity between public goods and innate talent. Constrained optimal policy with a Pareto-efficient objective that strikes a balance–controlled by a single parameter–between this principle and the familiar utilitarian criterion can be simulated using conventional constraints and methods. A wide range of optimal policy outcomes can result, including those that match well several features of existing policies. To the extent that such an objective reflects the mixed normative reasoning behind prevailing policies, this model may offer a useful approach to a positive optimal tax theory. |
| JEL: | D63 H21 H41 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20735&r=pbe |
| By: | Dean Baker |
| Abstract: | In January of 2013 nearly every worker in the country saw their payroll tax increase by 2.0 percentage points. The payroll tax holiday that had been put in place at the start of 2011 ended in December of 2012, leading to a jump in the Social Security tax from 10.4 percent to 12.4 percent of earnings up to the taxable limit. This was an extraordinarily large increase in the payroll tax. Past increases had generally been phased in gradually. For example, from 1980 to 1990 the tax rate was increased by a total of 2.24 percentage points; however in no year did the rate rise by more than 0.72 percentage points, just over one-third of the 2013 increase.3 If the public was strongly opposed to any tax increases, it would be expected that one as large as the 2013 rise in the Social Security tax would lead to considerable anger, especially given the weakness of the labor market which was still very much feeling the impact of the 2008-2009 recession at that point. |
| Keywords: | social security, payroll tax |
| JEL: | H H5 H55 H2 H3 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2014-15&r=pbe |
| By: | HINDRIKS, Jean (Université catholique de Louvain, CORE, Belgium); nishimura, YUKIHIRO (Osaka University, Graduate School of Economics, Japan); , |
| Abstract: | This paper reexamines the work of Kempf and Rota-Graziosi (J. Pub. Econ. 94: 768-776, 2010), which shows that leadership by the small region is the risk dominant equilibrium under the endogenous timing game. They obtain this result in a model where the asymmetry among countries translates into different gradients of the demand for capital but identical vertical intercept. In this note, we simply reverse the form of asymmetry by considering different vertical intercepts but identical gradient. The reason is that market power is typically related to the intercept and not to the slope of the demand function. We then show that the large region tax leadership becomes the risk dominant equilibrium and can even become Pareto superior. |
| Keywords: | endogenous timing, tax competition, reaction function |
| JEL: | H30 H87 C72 |
| Date: | 2014–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2014029&r=pbe |
| By: | Meijdam, A.C. (Tilburg University, Center For Economic Research); Ponds, E.H.M. (Tilburg University, Center For Economic Research) |
| Abstract: | Abstract: This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-à-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding. |
| Keywords: | public sector pension plans; funding; implicit debt; portfolio approach |
| JEL: | H55 H75 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:1c5b7af1-e1ee-4d01-a341-f470c9bece78&r=pbe |
| By: | Peter Eibich |
| Abstract: | Retirement leads to changes in daily life that may affect health positively or negatively. Existing empirical evidence is inconclusive: While a few studies identify negative health effects, the majority of studies find no or positive effects of retirement on health. The mechanisms behind these effects remain unclear, as is the question of which parts of the population benefit most from retirement. Recent studies indicate that retirees use their increased leisure time for healthier behavior. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwrup:48en&r=pbe |
| By: | Razin, Assaf; Sadka, Efraim |
| Abstract: | Over the years, there emerged two key policy differences between Europe and America, both welfare and migration-states. The former has more generous welfare state and more liberal migration policies than the latter. In this paper we attempt to provide a political-economy explanation for these key differences, based on the degree of coordination among member states of the economic union, and the different levels of population aging. |
| Keywords: | Fiscal and Migration Competition; Fiscal and Migration Coordination |
| JEL: | F22 H23 J11 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10127&r=pbe |
| By: | Gary Burtless (Brookings Institution) |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:sip:dpaper:14-009&r=pbe |
| By: | Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Tania Treibich |
| Abstract: | In this work we analyze the short- and long-run effects of fiscal austerity policies, employing an agent-based model populated by heterogeneous, boundedly-rational firms and banks. The model, in line with the family of "Keynes+Schumpeter" formalism, is able to account for a wide array of macro and micro empirical regularities. In particular, it endogenously generates self-sustained growth patterns together with persistent economic fluctuations punctuated by deep downturns. On the policy side, we find that austerity policies considerably harm the economy, by increasing output volatility, unemployment, and the incidence of crises. In addition, they depress innovation and the diffusion of new technologies, thus reducing long-run productivity and GDP growth. Finally, we show that "discipline-guided" fiscal rules are self-defeating, as they do not stabilize public finances, but, on the contrary, they disrupt them. |
| Keywords: | agent-based model, fiscal policy, economic crises, austerity policies, disequilibrium dynamics |
| Date: | 2014–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2014/22&r=pbe |
| By: | Bauer, Thomas; Breidenbach, Philipp; Schmidt, Christoph M |
| Abstract: | Using the location of baroque opera houses as a natural experiment, Falck et al. (2011) claim to document a positive causal effect of the supply of cultural goods on today’s regional distribution of talents. This paper raises serious doubts on the validity of the identification strategy underlying these estimates, though. While we are able to replicate the original results, we proceed to show that the same empirical strategy also assigns positive causal effects to the location of historical brothels and breweries. These estimated effects are similar in size and significance to those of historical opera houses. We document that all these estimates reflect the importance of institutions for long-run economic growth, and that the effect of historical amenities on the contemporary local share of high skilled workers disappears upon controlling for regions’ historical importance. |
| Keywords: | historical amenities; human capital; regional competitiveness |
| JEL: | H42 J24 R11 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10098&r=pbe |
| By: | Pauline Givord; Céline Grislain-Letrémy; Helene Naegele |
| Abstract: | This study evaluates the impact of fuel prices on new car purchases, using exhaustive individual-level data of monthly registration of new private cars in France from 2003 to 2007. Detailed information on the car holder enables us to account for heterogeneous preferences across purchasers. We identify demand parameters through the large oil price fluctuations of this period. We find that the sensitivity of short-term demand with respect to fuel prices is generally low. Using these estimates, we assess the impact of a policy equalizing diesel and gasoline taxes. Such a policy would reduce the share of diesel in new cars purchases from 69% to 66% in the short-run, without substantially changing the average fuel consumption or CO2 emission levels of new cars. Alternatively, a carbon tax would slightly decrease the CO2 emission levels of new cars in the short-run (by 0.1%) without any significant impact on the share of diesel cars purchased. |
| Keywords: | Fuel prices, automobiles, carbon dioxide emissions, environmental tax |
| JEL: | C25 D12 H23 L62 Q53 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1428&r=pbe |